Debt Management Plans: Who They Help, Who They Hurt and What They Cost
Americans owe a collective $18.8 trillion in household debt, including mortgages, auto loans and credit cards, according to the Federal Reserve Bank of New York. Debt is a burden millions face, and paying it off can feel overwhelming, especially when high interest rates make it difficult to make progress.
For some borrowers, a debt management plan (DMP) can help get back on track financially, but it's not the right solution for everyone. Here's what experts say about how debt management plans work, who they're best suited for and what they cost.
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How Debt Management Plans Work
DMP is a repayment program offered through nonprofit credit counseling agencies that negotiate lower interest rates on unsecured debts, such as credit cards, personal loans and some medical bills, per the National Foundation for Credit Counseling (NFCC). It doesn't reduce the principal you owe.
Most plans aim to tackle the debt in three to five years, and you can find a reputable agency through the NCFF and the Financial Counseling Association of America.
How DMPs Can Speed Up Credit Card Payoff
DMPs allow someone to enroll just one or two of their debts and keep the rest in normal status.
"This can be very useful when you have one or two credit cards with large balances, you have stopped using them, but only paying the minimums has limited your ability to pay down the debt," said debt and bankruptcy lawyer Ashley F. Morgan, attorney at Ashley F. Morgan Law, PC.
She explained that just paying the minimum every month can take 12 to 20 years to pay off a higher-balance credit card, but using "the same payment but lowering the interest, you could be debt free in five years."
Who Benefits from a Debt Management Plan
A DMP is best for people with high-interest credit card debt and enough income to make consistent monthly payments.
"Many people are paying credit card interest rates approaching 25% or 30%, and if those interest rates can be reduced significantly, much more of each monthly payment goes toward the principal balance instead of interest," Morgan said.
But having a steady income is key. Missing multiple payments can jeopardize your reduced interest rates or even remove you from the program.
When a Debt Management Plan Doesn't Help
A DMP provides structure and lower interest rates, but it isn’t for everyone.
“One thing I regularly see is people trying to force a debt management plan onto a budget that simply does not work,” Morgan said. “If someone cannot realistically repay their debt over several years, lower interest alone may not fix the problem.”
She also cautions that DMPs do not apply to all types of debt. Most plans primarily address unsecured credit card debt and typically do not include mortgage arrears, auto loans, tax debt, student loans, or legal judgments.
“It’s important to look at the full financial picture,” Morgan said. “Otherwise, you may fix one type of debt while other problems continue to grow.”
Debt Management Plan Costs
Every DMP costs a small price, which varies by state and company. DMPs typically charge a $33 to $75 setup fee and a monthly fee of up to $69, although fees may be waived for financial hardship.
Risks and Drawbacks To Consider
Debt management plans can lower interest rates, but they also come with trade-offs. Morgan said borrowers should keep these in mind:
Enrolled credit cards are usually closed, which can temporarily lower your credit score and reduce your available credit.
You won't be able to use those accounts while you're in the program, so it's important to plan ahead.
Debt management isn't the same as debt settlement. DMPs lower interest rates, while debt settlement attempts to reduce what you owe and generally carries more risk.
Alternatives to Debt Management Plans
A debt management plan isn't the only way to get out of debt. Depending on your financial situation, other options may include debt consolidation, balance transfer credit cards, bankruptcy, or changing spending habits.
"Living as frugally as possible while making all your minimum payments and putting extra money toward one debt at a time—using the snowball or avalanche method—is one of the most successful ways to pay off debt and address overspending," said Melanie Musson, a finance expert with Quote.com.
A debt management plan can be a valuable tool for some borrowers, but it's important to weigh the costs, benefits and alternatives before deciding if it's the right fit.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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